What Does Consolidation in the Cable Industry Mean for ARRIS Group, Inc.

Arris Group faces a risk as pay-TV operators consolidate. Should investors worry?

May 19, 2014 at 11:30AM

Consolidation within the pay-TV industry appears imminent. Earlier this year, Comcast (NASDAQ:CMCSA) announced it agreed to acquire Time Warner Cable (NYSE:TWC). Recently, AT&T (NYSE:T) announced that it proposed to buy DIRECTV (NASDAQ:DTV).

While there are several reasons behind Comcast's and AT&T's decisions to buy out competitors, the question for ARRIS Group (NASDAQ:ARRS) investors is how will consolidation affect the equipment suppliers?

What ARRIS has to say about it
In ARRIS's most recent 10-Q, the company notes that consolidation within the industry poses a risk to the company's business:

When consolidations occur, it is possible that the acquirer will not continue using the same suppliers, thereby possibly resulting in an immediate or future elimination of sales opportunities for us or our competitors. Even if sales are not reduced, consolidation can also result in pressure from customers for lower prices, reflecting the increase in the total volume of products purchased or the elimination of a price differential between the acquiring customer and the company acquired.

Comcast, Time Warner Cable, and AT&T represent three of the top-five customers for ARRIS. Last quarter, Comcast accounted for 16.6% of sales, Time Warner accounted for 13%, and AT&T accounted for 11%. Any change in orders or pricing from one or more of those customers could have a significant impact on ARRIS's earnings.

What can investors expect from Comcast-Time Warner?
Shares of ARRIS spiked on the news that Comcast would buy out Time Warner. Comcast owns a 7.85% stake in ARRIS group, which means the interests of both companies are fairly aligned.

Comcast tapped ARRIS to help produce the cable operators X1 set top box, and also uses home gateways from the company to deliver video. Considering Comcast would take over operations, should the merger with Time Warner go through, ARRIS stands to gain from further opportunity to sell the premium XG1 system.

Moreover, both Comcast and Time Warner are following similar technology paths. Internet speeds are increasing at both companies, as both operators move to deliver IP-based video. They are both focused on user experience as a differentiator to competition from the likes of AT&T and other telecom companies, as well as DIRECTV and satellite providers.

ARRIS is well positioned to facilitate both companies while demanding higher ASPs for premium services and equipment. A Time Warner acquisition will only accelerate that trend considering Comcast's leading technology.

What about the AT&T-DirecTV merger?
Although AT&T is a big customer of ARRIS's, DIRECTV gets its most popular equipment, the Genie set-top box, from Pace. Considering the size of DIRECTV's subscriber base, ARRIS may not be able to capitalize on the deal in the same way as the Comcast-Time Warner merger.

DIRECTV ended the first quarter with 20,265,000 subscribers in the U.S. Including international subscribers, the company counts more than 38 million customers. Comparatively, AT&T ended last quarter with 11.3 million U-Verse subscribers, but only half subscribed to its television service.

It wouldn't make sense for AT&T to spend an enormous amount of money moving from DIRECTV's legacy technology to a new supplier in ARRIS. Moreover, AT&T uses the same supplier of DIRECTV's Genie for its low-end home gateway networking equipment.

ARRIS investors shouldn't be worried, though. As AT&T rolls out higher speeds, works to get the most out of its copper infrastructure, and introduces gigabit services, ARRIS is poised to win new sales. ARRIS already supplies the Motorola NVG510 gateway to U-Verse households that subscribe to Internet speeds above 6 Mbps.

AT&T is very good at upselling customers to higher speeds. Over 60% of U-Verse Internet subscribers have a plan delivering speeds above 6 Mpbs. As AT&T rolls out bundled services and more IP-based video features to DIRECTV it should be able to convert more customers to faster broadband connections. That's good for ARRIS.

In the end, the risk of a deal between AT&T and DIRECTV balances out with the upside.

ARRIS is looking good
ARRIS may state that consolidation poses a risk to its business, but the risk seems relatively small considering its position in the broadband and cable industry.

The potential merger of Comcast and Time Warner presents significant upside for ARRIS should the deal go through.

The AT&T-DIRECTV deal presents more risk, but the potential for AT&T to expand its broadband penetration presents some upside as well. Moreover, DIRECTV isn't tied to Pace. It's already moving away from the set-top maker with its next iteration of the Genie, and there's no reason ARRIS couldn't eventually win a design with an AT&T-owned DIRECTV considering its strong ties to the former.

Arris is ok short-term, but your cable company is eventually going away
You know cable's going away. But do you know how to profit? There's $2.2 trillion out there to be had. Currently, cable grabs a big piece of it. That won't last. And when cable falters, three companies are poised to benefit. Click here for their names. Hint: They're not Netflix, Google, and Apple. 


Adam Levy owns shares of Arris Group. The Motley Fool recommends DirecTV. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers